New Stable

Expanding and reforming the role of the Local Government Pension Scheme in driving affordable housing

Author: Sandy Forsyth   |   14/05/2025

Solving the housing crisis, a stated but unrealised goal of successive recent governments, is both a generational challenge for policy and a hugely significant potential investment in place. That a crisis exists is well-rehearsed, but its hydra-like, multifaceted nature must be stressed. The housing crisis is principally one of supply, with not enough homes being built in general year-on-year. Beyond this, however, is the crisis over the type of homes being supplied – with far too few genuinely affordable and social homes being built. This means that an uptick in supply itself without further intervention will not alleviate the problem. There are also myriad effects of the crisis and the vicious cycle they create: the pressure on services such as temporary accommodation caused by homelessness, the enormous and unequally distributed downwards pressure on disposable income caused by escalating housing costs.

It is for all these reasons and more that the new government have placed the delivery of homes at a scale not seen in decades at the centre of their agenda for this Parliament, with much of the responsibility sitting on the shoulders of local authorities. The Local Government Pension Scheme (LGPS) is cited by the chancellor as a key means to achieve investment. New Stable puts forward the case that, by creating appropriate investment vehicles and funding principles, and providing clear government incentives and support, the LGPS can become a significant source of patient capital for addressing the UK’s chronic under-investment in genuinely affordable and social housing, ultimately contributing to both social prosperity and national economic growth. As part of this, the report also explores the potential for a long-term and stable lower rate of local authority contributions into the LGPS to act as a means of increasing access to revenue spend for support the crucial task of addressing the housing crisis.

Key points

Housing, the growth agenda and the LGPS

The government has made the delivery of homes at significant scale central to its agenda for this parliament, aligning with a cross-governmental push to increase institutional investment into the UK economy. The £392bn Local Government Pension Scheme (LGPS) in England and Wales is cited by the Chancellor as a key means to achieve this investment, primarily through the policy of LGPS pooling. Simultaneously, various reforms are underway to support the growth agenda, encompassing areas like skills, innovation, and regional potential, including restructuring local governance, reorganising councils, and mandating statutory growth plans by strategic authorities.

The interim report of the pensions review recommended a consistent approach to asset pooling and called for LGPS funds’ administering authorities to work with local and strategic authorities to identify local investment opportunities and regard local growth plans in their investment strategies. An alternate response to the large LGPS surplus (around £45bn total in June 2024, measured on a low-risk basis) is to adjust employer contribution rates downwards, allowing local authorities to retain a greater portion of their general funds. This does not need to be a binary choice, there is a case for a two-pronged approach to utilising the surplus and the strong conditions in the pension market, where a mix of targeted investment and sustainable lowering of contributions helps build up both the capital and the capacity for driving local growth.

Addressing the housing crisis as a pro-growth measure

The housing crisis is a significant barrier to economic growth, stemming from both a lack of overall supply and, crucially, an insufficient provision of genuinely affordable and social homes. Investing in genuinely affordable and social housing aligns with the long-term characteristics of pension schemes, and many LGPS funds already have a history of co-investment in this area. Directing LGPS assets towards affordable and social housing can increase supply, helping to alleviate pressure on council services and reduce the financial burden on low-income households.

Successfully utilising LGPS for social housing requires understanding the landscape of public sector institutions involved (like local government, housing associations, and central bodies) and establishing effective vehicles for collaboration, such as joint ventures. Leveraging strategic planning frameworks like local growth plans and Spatial Development Strategies is key to unlocking potential and building credible, long-term investment programmes. Central bodies like Homes England can play a role in overseeing and packaging national affordable housing opportunities to make them more attractive to institutional investors.

Creating the right conditions

Properly utilising the LGPS for social housing requires an understanding of the primary public sector institutions involved in planning and financing new homes, particularly social and genuinely affordable developments. This is a complex but potentially fruitful institutional landscape where local government, housing associations, and central government bodies like the National Wealth Fund and Homes England each play crucial roles in enabling LGPS investment into social housing. The key to unlocking this potential lies in establishing effective vehicles for collaboration and investment, such as joint ventures, and leveraging the strategic planning framework provided by local growth plans and Spatial Development Strategies.

Bringing these public sector actors together, along with private sector developers and investors, requires the strategic use of joint ventures and other vehicles, anchored in local or strategic authorities. Building credible, long-term and scaled programmes around which such vehicles can coalesce is the defining task of the statutory local growth plans and Spatial Development Strategies which are to be produced by strategic authorities under the new policy regime. For institutional investors, these plans could provide clarity of purpose and realistic outcomes for local development. They need to be achievable and supported by sufficient funding and powers for implementation to avoid the pitfalls of past initiatives. The recommendations below present steps towards creating a more favourable investment environment for the development and delivery of such pipelines.

Recommendations

Maximising the value of LGPS investment and responding to the surplus

• To ensure the pooling process is carried out with maximum efficacy and impact, government should extend the deadline to 2027 and provide clear guidance for investments which are linked with national missions and highlight the importance of social returns.
  • New guidance and regulations should take an open-minded view on the LGPS surplus and lower contributions. Central government must offer explicit guidance to LGPS fund managers on how they can invest locally in housing while still fulfilling their fiduciary responsibilities, including a distinction between required assets and surplus assets. This should reassure them that local investment in well-structured projects is compatible with their duties.
  • Central government should promote the use and development of metrics that properly evaluate the broader social and environmental impact of investments in social and genuinely affordable housing, alongside financial returns on fund assets.
  • As part of the accelerated pooling process, government should review the allocations individual funds currently hold towards social and genuinely affordable housing in the UK, as well as providing guidance on the pooling of illiquid assets in general.
  • A deferral of the pooling until 2027 would allow pension funds to prioritise the 2025 actuarial valuation into decisions on employer contributions and investment risks in 2025/26.
  • The LGPS pools should be encouraged to hold information sessions with their scheme members and scheme employers about the social impact of their funds investment and their maintenance of fiduciary duty.
• In the case of a pension fund choosing to lower its contribution rates in order to provide cash savings for its employers, local authority employers could be mandated to use a proportion of the savings made from contribution reductions as a revenue contribution to capital expenditure. This proportion should be calculated based on the rate of contribution reduction, so that administering authorities will still be incentivised to cut rates and make initial cash savings, but those that are enjoying larger funding surpluses will be able to divert cash into more upstream investments.

Unlocking social and genuinely affordable housing investment

• The government should consider the case for reclassifying social housing as significant national infrastructure to unlock more capital funding and align it with other priority infrastructure investments.
  • The provision of social housing would therefore fall under the remit of NISTA and the government’s 10-year infrastructure strategy.
  • The National Wealth Fund should also have its mandate extended to include the provision of social housing as significant national infrastructure.
• To make sustained investment in new development possible, government must also provide a long-term deal for the financing of capital backlogs in the local authority HRAs and Housing Associations.
  • The capital works backlogs faced by local authorities and Housing Associations stands as a major barrier to investing in new social and genuinely affordable housing. Establishing a long-term financing arrangement as a means of alleviating rising maintenance and service costs, or protection from inflationary pressures on existing developments, could ensure that institutional investors do not neglect their physical assets.
• Policy should encourage and facilitate the creation of joint ventures and partnerships between local authorities, housing associations, LGPS pools and others to develop housing projects, sharing risks and expertise.
  • In the case of an administering authority diverting capital into either a Special Purpose Vehicle earmarked for housebuilding or a joint venture scheme, then all parties involved need to have the stability that will only exist if the administering authority has the capacity to engage with expert insight. Consequently, the success of any initiative which requires administering authority involvement will rely on sufficient capacity funding.

Creating a pipeline

• Government should actively work to help local authorities and housing associations create credible and scalable pipelines of social and genuinely affordable housing projects that meet the investment criteria of institutional investors like LGPS funds. This includes addressing issues of local authority capacity.
  • In order to manage the risk/return profile of affordable housing investment, there is a role for central government to extend grant provision for affordable housing development beyond its current commitments, with grants available for all stages of development, from pre-planning to construction.
  • A regulatory tie-in for stakeholders in affordable housing developments will be required to ensure that ownership means responsibility, especially in the case of ongoing maintenance needs.
  • Maintaining high standards in the social housing sector through well-funded regulation is crucial for LGPS funds to have confidence that their investment will lead to positive social outcomes.
• The government should ensure that statutory local growth plans and spatial development strategies produced by strategic authorities effectively align and synchronise an infrastructure pipeline and align with LGPS local investment strategies. These plans need sufficient central government support and resources to be credible and effective.
  • Collaboration between strategic authorities, housing associations and regional Homes England teams will be essential in developing credible strategies.
  • Given that social and genuinely affordable housing may offer lower returns compared to other real estate assets, prospectuses must provide clear incentives and support mechanisms, lowering risk and making these investments more attractive to LGPS funds while respecting their fiduciary duty.
• Homes England is positioned well to provide central oversight of the national affordable housing development pipeline. As such, it could feasibly package the affordable housing offering across the nation into a single, or at least less fragmented, investible proposition, which would leverage its scalability to provide an attractive environment for the involvement of institutional investors.
  • Homes England should also offer investment expertise, or otherwise, resourcing to encourage in-house expertise in LGPS pools, with the goal of encouraging pool decision-makers to take on more diverse investment strategies for housing – such as thinking about the potential for investing in hybrid property funds, or models with different durations of asset ownership.

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